Avanos Medical, Inc. (AVNS) Q2 2017 Earnings Report, Transcript and Summary

Good morning. And welcome to the Halyard Health Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead sir.

Thank you, and good morning, everyone. It is my pleasure to welcome you to the Halyard Health second quarter earnings conference call. With me this morning are Robert Abernathy, Chairman; Joe Woody, CEO; and Steve Voskuil, Senior Vice President and CFO. Robert will begin with a brief discussion of our CEO transition, then he'll hand over the call to Joe who will provide his perspective on industry trend, his strategic vision for Halyard, and our progress toward our 2017 priorities. Then Steve will review our financial performance and provide additional detail on our outlook for the balance of the year. We will finish with Q&A with Joe and Steve. A presentation for today’s call is available on the Investors section of our website, halyardhealth.com. As a reminder, our comments today contain forward-looking statements related to the company, our expected performance, economic conditions, and our industry. No assurance can be given as to future financial results. Actual results could differ materially from those in forward-looking statements. For more information about forward-looking statements and the risk factors that could influence future results, please see today’s press release and our prior filings with the SEC. Additionally, we will be referring to adjusted results and outlook; both exclude certain items described in this morning’s press release. The press release has further information on these adjustments and reconciliations to comparable GAAP financial measures. Now, I'll turn the call over to Robert.

Thanks, Dave, and good morning, everyone. I appreciate your interest in Halyard Health. I recently announced my retirement as CEO and the Board elected Joe Woody to succeed me. I continue to serve as Chairman to ensure a smooth transition. I'm happy to report that the transition process has been seamless, efficient, and tracking to plan. Accordingly, I will also be retiring as Chairman of the Board effective September 1st, and Ron Dollens, currently our Lead Director will take over as Non-Executive Chairman. Now, let me introduce Joe. Joe is an experienced CEO with more than 20 years in the medical technology industry. Over the course of his career, Joe has a proven record of executing portfolio transformations by driving growth, accelerating innovation, and keeping a laser-focus on understanding and anticipating evolving customer and patient needs. His experience, coupled with his leadership skills, make him the ideal person to lead Halyard to the next stage of our transformation. Before turning the call over, let me say a few words about the progress we've achieved in advancing our transformation. In short, we accelerated growth in our Medical Devices' business and successfully executed our first acquisition. We built a solid foundation for growth by increasing our investment in research and development and we reestablished Halyard's innovative culture. Leading Halyard for the past three years has been an incredible journey and I'm confident about our future. With an outstanding leader like Joe at the helm, we are well-prepared to move to our next phase of growth. Now, I'll turn the call over to Joe.

Thank you, Robert, and good morning, everyone. Let me start by saying that I'm thrilled to be leading Halyard and its talented team. Before we get into the quarter's performance, I want to take a few minutes to introduce myself and I will share the trends I see across the sector and why I think we have so many opportunities ahead of us. As some of you may know I have spent my entire career in med tech and I have been fortunate to have worked for some great companies during the past 20 plus years. Over the course of my career, I have developed a deep understanding of the industry and gained significant experience in developing and driving transformation strategies; most recently at Acelity and prior to that at Covidien. While certainly each company and situation is different, some core elements across those experiences are very relevant to Halyard; such as pivoting towards high growth profitable markets; reinforcing the innovation culture as well as a culture that embraces existing and emerging technologies; and instilling a laser-focus on the customer; understanding and anticipating evolving customer needs; and prioritizing quality, safety, and the customer experience. Building off those elements, I believe we can create significant opportunities for Halyard. Specifically I see three key focus areas for us going forward; markets, products, and technology. I want to share my thoughts on each. First markets, we will expand our focus into high growth in markets, both in the United States and internationally. Second, products, we have a significant opportunity to leverage the effectiveness of our non-opioid pain therapies, both ON-Q for post-surgical pain relief and COOLIEF for osteoarthritic knee pain take advantage of this opportunity. Outside of our pain categories, we offer differentiated and preferred products such as CORTRAK, which ensures the accurate placement of nasal gastric tubes. These solutions deliver improved patient outcomes and healthcare economic benefits. The third key focus area is technology. We'll enhance our technological capabilities and partnerships by leveraging existing and new technologies across our diverse portfolio and drive a new generation of more advanced technologies and clinical therapies. Now, looking at the Medical Device sector more broadly, it continues to be healthy and exciting with enormous potential and the M&A market is dynamic which we plan to take advantage of as we incorporate acquisitions as a driver of our growth. Corpak is an excellent example of our ability to identify strategic accretive acquisitions, effectively actively integrate them into our business, and leverage our operations infrastructure. All combined, I believe, there are a number of prospects for us to advance and accelerate our transformational goal of being a leading Medical Device company. We'll continue to focus on growth whether through strategic M&A, new product development, expansion into new markets, or better leveraging our businesses to generate more synergies, and increase productivity. Move to the next phase of our strategic journey, we will need to enhance our execution, energize the culture, and sustain and enhance our strategic focus on customer needs, and increase the speed and performance of our initiatives to fuel our growth pipeline. An important step in advancing our transformation is to achieve our two priorities for the year and we've made progress on both. Our first priority is to deliver our 2017 plan. I'm pleased to report we completed another solid quarter with adjusted diluted EPS of $0.51 with a strong first half of the year, driven by focus and execution, we now expect 2017 adjusted diluted EPS to range between a $1.85 and $2.05. Turning to our second priority, which is fueling our growth pipeline, we are investing in innovation, while building on our strengths. For instance, we continue investing in our fast-growing interventional pain business. During the quarter, we launched our COOLIEF direct-to-patient marketing campaign for the treatment of osteoarthritic knee pain. Response has been strong and represents an exciting market development opportunity. Also we launched three products that demonstrate our commitment to improving outcomes and safety. Year-to-date, we have launched seven products and remain on track to launch more than 12. With that, I'll turn the call over to Steve for a more detailed look at the quarter and our outlook for the balance of the year.

Thank you, Joe. Let me start by saying that I'm pleased that our execution in the first half of the year positioned us to raise our 2017 adjusted diluted EPS outlook. For the quarter, sales total $399 million, even compared to the prior year. Volume, including, Corpak increased 3%, which was partially offset by lower selling price. Adjusted gross margin was 36% percent for the quarter, unchanged compared to a year ago. Our portfolio shift to Medical Devices, manufacturing efficiencies, and favorable currency exchange rates, helped offset the impact of lower selling prices and anticipated higher nitrile cost. As the year unfolds, we anticipate gross margin expansion in the second half of the year as our portfolio shift continues and commodity cost decreased. Adjusted operating profit and operating margin for the quarter were $40 million and 10% respectively compared to $41 million and 10% in the prior year. During the quarter, we incurred $2 million for acquisition-related charges, $6 million for litigation matters, and $5 million for intangible renovation expenses. These were partially offset by $2 million spin related benefit from the higher than expected sale of Kimberly-Clark branded inventory. Adjusted EBITDA was $51 million for the quarter, even compared to the prior year. As Joe mentioned, we reported $0.51 adjusted diluted earnings per share for the quarter. Three factors drove our performance. First, our ability to drive greater manufacturing and distribution efficiencies in such areas as material waste, production optimization, and inventory management. Second, while R&D expense increased sequentially to $10 million, it was lower than expectations due discipline project decision making. Finally, through our ongoing tax planning, our adjusted effective tax rate was 27.2%. Now, turning to our segment result, Medical Devices delivered another solid quarter of growth as net sales increased 5% to $149 million. Performances was aided by one month of incremental Corpak sales and higher volumes across all product categories. Organic volume grew 3%. Performance was impacted by volume that shifted to the fourth quarter due to an order pattern change from key distributor of IV Infusion products in the U.S. Medical Devices operating profit increased 40% to $41 million compared to $29 million a year ago. Performance was driven by higher sales volume and manufacturing efficiencies. Lower SG&A from Corpak related synergies and the timing of our marketing spend also aided performance. Moving to S&IP, markets remained challenging for our business year-to-date is ahead of plan. Net sales decreased by 4% during the quarter to $247 million. In total, S&IP volumes were flat compared to the prior year. Continued volume growth in Exam Gloves was offset by lower volume in Facial protection due to the timing of the cold and flu season and decreased Exam Glove sales to Kimberly-Clark. Lower selling prices concentrated in Exam Gloves led to 4% price loss for the quarter. S&IP performance was largely impacted by anticipated higher nitrile costs as operating profit was $15 million compared to $25 million in the prior year. Lower selling price also affected performance which was partially offset by manufacturing efficiencies and favorable currency exchange rates. Moving to our balance sheet and cash flow generation. We ended the quarter with $155 million of cash, Cash from operating activities less capital expenditures are free cash flow, totaled $13 million for the quarter in line with our expectations. We continue to project full year free cash flow of $100 million. Shifting to our 2017 outlook. As highlighted previously, we expect to earn adjusted diluted EPS between the $1.85 and $2.05. Additionally, we lowered our key planning assumption for commodity inflation to $5 million to $10 million from $10 million to 20 million for the year. Commodity costs should provide tailwind in the second half of the year. However, there are several factors that will offset this benefit. First, unfavorable currency exchange rates for the Mexican peso and the Thai baht compared to our plan are expected to be a second half headwind. Second, from manufacturing standpoint, while we generate efficiencies above our expectation we will begin to anniversary some of those projects implemented in the second half of last year. Also, we anticipate higher distribution costs in the third quarter as we relocate some of our global distribution centers. Third, as I discussed, R&D spending was below our plan, but we remained committed to accelerate investment to grow our innovation pipeline. Our other key planning assumptions which we provided on our year-end conference call remain unchanged. In summary, we are well-positioned to deliver on our plan and fuel our growth pipeline. We are at the midpoint of the year and we've increased our guidance. Our strong balance sheet provides us with firepower to invest in growth opportunities including M&A and innovation that will further accelerate our transformation into a leading Medical Devices company. With that operator, we are ready to take questions.

Thank you. [Operator Instructions] And your first question will come from Rick Wise of Stifel. Please go ahead.

Good morning, everybody and welcome, Joe. Maybe just first -- you laid out a very compelling plan hence it makes a lot of sense the transformation, acceleration, maybe you could just expand on that a little bit the advance and accelerate, expanding into faster growing markets. It's early, but do you see these opportunities in adjacent areas, are you going to inevitably have to move into new verticals or whitespace? And do have aspirational goals for M&A divestitures and I am sorry for the long question, but I want to add X number of sales, but just can you just give us a little meat behind those compelling thoughts?

Thanks Rick. Yes, I think I'll do both, I'll give you some impressions and then a little bit of an idea how I might go about strategy. So, first of all, I'm very excited about the opportunity I see. I've seen a lot of challenge businesses in my time and this is a great foundation and really, sort of, a blank sheet. We have strong positions in our market. We have a supportive Board with cash for M&A and good cash flow generally in the business. I think I can impact faster growth M&A both that way and commercial excellence. And innovation opportunity is strong, especially mid and long-term. And then I also believe that there are a couple of really strong growth opportunities I immediately see in the business, COOLIEF in the pain segment, and frankly, obviously, seeing what's going on with Corpak. In terms of strategy, I think there's a good strategy here. I think that can enhance that strategy. I plan a strategic review of the business over the next 90 days and more specifically, to what you're looking for, probably there will be a portfolio management review to make sure that we're invested in the areas that can grow and probably move some investment in areas that aren't likely to grow. I see an opportunity as well geographically, in particular, international, I think that's a combination of assessing where we might be better off direct versus what distributors can bring to the business. And my focus is going to be on technology because I believe that you need to have differential technology. I think we have something here. I'm a supporter in the long-term of PMAs and that type of approach to the business. And, again, I can foresee pain being an area where we obviously invest and you can see additional M&A there and you've seen the organization and management team prior to me do that type of adjacency work with Corpak and accretive deals and so the M&A piece initially would be the same accretive of high margin, near adjacencies, more likely in the Medical Device segment, but over time, I see that we need new platforms in the business and I think as you move sort of into the back half of 2018 and into 2019, there's opportunity for us and that's going to be a big part of the strategic review is what are those new platforms and where do we have a right to win? So, I also said a lot -- you asked a lot of questions, I [said lot of] out there.

Okay. Two quick -- last ones from me, a little more briefly. Steve, the first half you did roughly a buck in EPS. You called out some incremental second half headwinds and challenges. But it's -- you're basically saying you're going to do a buck in about round numbers in the second half if you look at the math on commodity prices. Is there -- why so conservative, why not to guide to the upper end more confidently? It seems like things are moving the right direction.

Yes, I think we had a very solid performance in Q2, particularly on cost of sales, I think cost of sales were probably the star of the show in the second quarter. Plant efficiencies, waste and delay were at record levels. We had a lot of projects put in place in the back half of last year that delivered a lot of savings in the second quarter. It's clearly some of that's going to be sustainable and move forward. We don't think we're going to lay up two more quarters of that kind of fantastic plant performance back-to-back. So, that's one factor. The other on the cost of sales side also is fixed cost absorption. You look at our balance sheet and we end it pretty lean on inventory at the end of 2016. We build back a little bit in the first quarter, but put back about $22 million in the second quarter. And that was by design -- just thinking ahead to the last stage of the Corpak integration and preparation for that. Also the oral care buildout that we've talked about in the past, there's a reason for it. But that drives more efficiencies through the plant when they're running faster and get some fixed cost absorption. As we look at the back half, we don't see that refeeding either, we're going to be back on the -- focus on inventory and may actually see it reverse a bit as we take some volume out of that pipeline in the back half of the year to continue to focus on working capital efficiency. So, that's on the cost of sales side. And then distribution also very strong through the first half, strong in the second quarter. But we have three DC moves that we have to do by the end of the year; one, that's happening right now. And we know from past experience, we get some inefficiency and additional cost with those DC moves. And so I don't think we're going to see quite the same distribution performance in the second half. As we talked about in the prepared remarks, sequential R&D, I expect to see move up, that's our goal. We're not going to spend it to spend it, we're going to be focused and disciplined. But we would expect to see some incremental investment there. And finally tax rate, we're not going to put up two more 27.2% tax rates, but really land inside of the 32% to 34% range, so when you kind of take all of those things, Rick, and I know that's a lot, that's what kind of causes us to temper the enthusiasm after a pretty strong first half. We are going to have some headwinds notwithstanding the nitrile benefit and I think particularly in the third quarter where some of these DC moves and some adjustments in inventory will probably take place.

That's very helpful. And just a quick thank you to Robert and congratulations on all the hard work and all the achievements and best of luck. Enjoy your grandkids.

Thank you. Thank you, Rick. Appreciate that very much.

The next question will come from Larry Keusch of Raymond James. Please go ahead.

Thanks. And just want to echo Rick's comments to you Robert.

Hey Larry.

So, Joe just want to pick up on two things that that you were addressing and I just want to make sure I'm sort of understanding where you're going with this. So, it sounds like you believe over time we should start to think about this companies having potentially moving towards PMA like products, which it certainly haven't done in the past. So, I want to make sure I'm understanding that that you believe that that's directionally where the company should go and I understand it's over time. And in the context of that, what do you think about just sort of levels of R&D spending, are they sufficient at this point or do you think that they continue to need to move higher, if you're going to start to support a PMA approach?

Thanks Larry. And it -- the PMA approach is a longer term and you certainly have to temper your investment along the way. But as an example, Lee Burns who Heads R&D for our business now, we worked together in the Vascular business at Covidien and he's I think been very wise with the way he spends and invest and recently has brought in some high talent and actually that's enabled him to spend less in some areas for outsourcing, but he sees that in the mid to long-term, there are opportunities in our pain business for us to advance our technologies and get to that level and certainly will take time. And of course the other way to do that, Larry, is to acquire a company that has that type of a position. So, we want to position ourselves over time. I think initially we need to continue along our four segments and bolt-ons that are accretive in life spaces versus natural for us and our channel. But we've got to move to that for a long-term sustainability in my view.

Okay, great. And then two others; one more for Joe and then one for Steve. So, Joe the second question is look the strategy for the company had been to bulk up the Medical Device business, improve that part through R&D spending. So, organic means, inorganic means, and sort of use the cash flows off of S&IP to help drive that inorganic process. So, if that's sort of the high level strategy of the company, I just want to see as you sit here today and I recognize things can change, sort of where do you see S&IP in that strategy going forward? Is it still a driver of the cash flow that that can be used for M&A?

Well, obviously, that changed over time in S&IP in particular, but I do think it's a good business. It can be stabilizing growth. I mean I've managed a turnaround more difficult situations I think back to Smith & Nephew was sort of a negative. The [ON-Q] business turnaround there negative mid-digits, even worse for KCI with much more price erosion $300 million or so on price over the time. When I was there on -- was effectively 90% gross margin products that makes it difficult. So, definitely more challenged situations. But you're seeing the team progressing, done a great job with this business in terms of cost and continuous improvement. And I think about -- you look at the small green chutes, right, and I think about Q1 to Q2 outside of facial protection, we had a movement up in all of the products. So, I do think that could be a strong business with the right level of innovation, geographic expansion, and obviously, stabilizing pricing. So, it can still be helpful in terms of the cash flow perspective to our overarching business.

Okay, great. And then last one, Steve, just wanted to just touch on the cadence of expected price pressure within the S&IP business. You have a fairly favorable comp in the fourth quarter. So, as we think about the second half of the year, the right way to think about pricing sort of consistent where we are now in the third quarter and then given a favorable comp and as you move out into the year, hopefully start to see some improvement?

Yes, I think that's exactly right, Larry. I think as Joe said, for the second quarter, we're pleased with what we saw at S&IP and its ahead of our plan for the quarter. Volume was positive, but facial protection, so encouraged by that. On the pricing side, pricing is on the high side of our guidance range for the second quarter, but for the reason you said, the back half of comps gets easier, particularly on the glove side. And again glove still accounts for more than half of all the price loss in this category, all the other category is less than 3%. So, as we get in the back half, we're going to lap a couple of glove contracts that are going to make an easier comp. And then as you said the fourth quarter of last year was particularly strong from a price loss standpoint and so we're still -- we still feel like the range we have out there from a planning standpoint is the right place to land.

Okay, great. Thanks very much guys.

Thank you, Larry.

The next question will be from Jonathan Demchick - Morgan Stanley of Morgan Stanley. Please go ahead.

Good morning. So, Joe, I wanted to start and kind of follow-off a little bit of what Larry was asking about. In Robert's introduction, he mentioned your experience with transforming businesses. In years there was a very large focus on the medical technology side with markets, products, and technology. Wasn’t a lot of focus on the S&IP segment, it sounded; in your last answer that you still do remain pretty committed to that business, is that the right way to be reading that? I mean obviously there was news inter-quarter about the potential of divesting the business?

In any given timeframe as you're managing a business like this, you're constantly evaluating your portfolio broadly across the divisions, but even against specific products inside of divisions. Obviously, we wouldn't comment on any kind of media speculation, but I do think it's our job to create value in the business and to be remain committed to the businesses that we have. So, that's my perspective on that. And I'm sorry, forgot the second part of your question.

I think that that covered that part pretty well. And I just have -- and I guess one quick follow-up on I guess the margin side, and this seems particularly that the Medical Device business' margins, at least over the first six months of the year, have been very strong -- I mean even stronger than when you started I guess looping in Corpak. So, -- and this is probably more for Steve, but I was just wondering if you could, kind of, help us think about what the margins for the Medical Device business as a standalone -- not necessarily a standalone entity, but I mean as I kind of think about -- as you guys break out margins for S&IP -- sorry for Medical Devices, how high do you think this should go? Or is this kind of the right margin profile in that upper 20s percent range as you just think about Medical Devices?

Yes, thanks John. I mean clearly bigger margins are better. So, we love to see the progression. As we talked about last call in that call and this call, the fact that we underspent a little bit in R&D, this plant is helping that device margin. So, the 27% or so that we have this quarter, I think it's a record, but at the same time we've also tend to spent as much on R&D as we had planned. So, we're not high-fiving on that side. On the other hand, we talked all year about this was going to be a year of margin progression on Device side and so we are seeing that play out. And as you said John, if you go back to the time of spend where you were kind of high teens and then into the low 20s and now hopefully, more solidly, in the mid-20s, we're pleased with that progression and I think as we continue to look at Joe said at organic and inorganic opportunities that are going to be margin enhancing and providing more growth, I think we've seen more longer term upside there even despite some of the investment we have to back on the R&D side.

Thank you. Very helpful.

Thanks.

The next -- [Operator Instructions] And our next question will come from Dave Turkaly of JMP Securities. Please go ahead.

Thanks. And I know you've mentioned some of the R&D plans you have and it seems like the pain business is a clear focus. I just wondered -- do you have any ongoing plans on the COOLIEF side? I know that reimbursement can be a little difficult there. And I'm curious to see sort of how you think those products are being covered today, is it getting easier or harder and do you think you might benefit from some data in that segment?

I think we're seeing that in particular, in [Indiscernible] base, but in generally, in COOLIEF. We put a focus on helping the preauthorizations where we can do that and make sure our customers are where the process of patients need to go to get access to a payer. And that means there will be a build up over time.

Yes, I think again, underneath the 3% organic device growth for the quarter, COOLIEF had strong performance. You saw the national media attention that therapy is starting to garner and out of that has come a lot of sales leads, along with the OA indication which we'll be selling hard against in the back half of the year. It takes a while to convert those sales, but we continue to be optimistic on the expansion of that therapy. So, much so that even in the last couple of weeks, we've directed a little bit more funding in that space to make sure we can capture and take advantage of that some attention.

While our SG&A remains somewhat level for the year, that's an area where you will likely see some investment from us, in particular, on COOLIEF because it's such a good opportunity.

And then -- I mean to the extent that you can give color in terms of the growth in ON-Q and COOLIEF, specifically under that 3%. And then the other last one for devices, the distributor, the IV thing, do we just think of sales there that you thought were happening this quarter now becoming online in the fourth quarter? Thanks.

Yes. I mean, just roughly, I can say on the IV piece, the movement, just 1% of growth for this quarter and we do think the second half of the year will pick that up.

Yes, basically a change of a distributer contract. And so I'd like to hope we get that back in the back half of the year. You can't guarantee, as that distributors don't always order the way we want and the timing we want. But I'd like to see we get that point back later. So, if I kind of just up back on device growth organically and think about the back half of the year, probably one point behind for the second quarter. I still feel we have a good shot of being inside that range for the full year. And you look inside the performance this year -- in this quarter, you can see some bright spots. We talked about COOLIEF already. We're still building the oral care side on the respiratory business. ON-Q itself had a very solid quarter, continuing to leverage the ON-Q track technology that, I think, we talked a lot about on the last call. And so -- and I will say Corpak business continues to outperform expectations. So, taken in total, we look at that and are pretty optimistic about the back half. Our plan for this year always called for increasing growth rate on the Device business over the course of the year. But clearly, we've got a lot of work to do to get from a 3% organic solidly into the 4% to 6% for the year.

Thanks.

The next question will be from Matt Mishan of KeyBanc. Please go ahead.

Hey good morning. And just following up on the last question. Could you walk through some of the drivers of why you're confident that the -- and why you had in your plan that the second half of 2017 versus first half of 2017 will see accelerating Med Device growth?

I can make a couple comments and then Steve can pick up. The COOLIEF area that we talked about, in particular in OA. He talked about the oral segment, the GPO win there. But generally, the plan does normally accelerate in H2. And historically, if you go back and you look at the years in the past that we get that pickup generally in sales. But Steve, you may want to add a couple of thoughts.

Yes, I think we've touched on some of the pieces. COOLIEF, the growth rate there, I think, on the back end of some of the media attention, the investments we've made on clinical and selling side, even looking in the back half of last year. It takes a while to get all those sales folks efficient, effective in the marketplace, but we do see momentum building there. Again, ON-Q continues to perform well through the second quarter. And so as we look in total, still feel that we're going to see that ramp up in the back half, again, on the basis of some of the investments on the clinical and the -- on the selling side that we've been making, really, through the back half of last year, even in first part of this year.

Okay, great. And then on the pricing in S&IP, I think that 4% pricing still feels pretty challenging. First-off, do you think that -- like especially as Joe [Indiscernible], do you think that normalized pricing for that business is still minus 1%? And when do you think you might be able to get down there?

Look I'll let maybe Steve pick up on the historical and long-term. But one thing that has surprised me as I came into the business from the outside and now on my fourth week, is that 50% of the price is oriented around one portion of the business in gloves. Interestingly, if you look at the remaining portion of the business, the price is less than 3% decline, which is really what a lot of med tech frankly are facing. Or devices, even in orthopedics, as an example, are facing that type of -- so the volume of opportunities to come up. Do you want to give us context?

Yes, I would say our outlook really hasn't changed in terms of where we see things eventually leveling out. Gloves is still the dominant factor here. And as we see nitrile price stabilize and those contracts finish the renewal process, that's going to take a big pressure point off from a price standpoint. But, again, I think we're going to see some of that even in the back half of this year. And as Joe said, then I think, it's going to look more to the macro landscape of what's happening in devices and price pressure in general in this space. And we'll get a chance, with Joe on Board, to kind of refresh the strategy and perspective on all that going forward.

Okay, great. And then last question, I was hoping if you could help me kind of walk from the midpoint of your original guidance, which was $1.85, to the midpoint of the new guidance. You got a nice moving piece with the commodity inflation. I think that gave you probably $0.10 or $0.11. What were -- eventually if you could quantify some of the other moving pieces to help us understand what some of the other benefits were and maybe some of the other -- how big some of the headwinds are? And congratulations, Robert and Joe, on the new roles.

Thanks Matt.

Thank you.

Yes and I probably won't quantify this to the level you're going to want, but I'll give you a perspective and hopefully answer some of the questions. So, if you just step back and look at guidance in general, we started the year with a $0.30 range, wider than usual, but to account for some of that commodity risk that we saw in the second quarter. And I'll say, we ended -- we were maybe more lucky than good, but we ended up calling that pretty much on plan for the second quarter. And I'd like to knock on wood and say we've retired that risk and so that's part of the reason for bring up the bottom. On the shift to the account side, the biggest driver, more than the commodities side, is the cost of sales performance. So, going back, I guess to the first question, we had a strong performance in the first half, particularly the second quarter. A portion of that is sustainable. And so we're going to leverage those improvements in lean manufacturing and continuous improvement to lift the cost of sales side in the back half. That's the biggest driver for the rise. The commodity windfall, yes, we're getting some of that. But on the other side, from a planning assumption standpoint, currency, we think, is going to swing the other way. And so that's going to be more of a planning assumption headwind in the back half in addition to the other things that we talked about earlier with the fixed cost absorption and some of the other things, distribution changes and so forth.

Thank you very much.

Thanks Matt.

The next question will be from Brittany Henderson of Deutsche Bank. Please go ahead.

Hi, thanks for taking the questions. Joe I just wanted to dive a little bit deeper on the focus in international markets that you mentioned within your prepared remarks and just the earlier commentary here. Can you talk specifically about what you're going to do to enhance the strategy as it relates to OUS markets? And which product areas, as you think about the Medical Devices business, for example, do you see as representing the largest opportunity for you internationally?

So, Brittany, what I think, it's really across all of our business, there's opportunity. I've lived abroad and run three or four global businesses and each of the markets are very different. So, one of the things that strikes me initially or specifically is we have a number of distributors. I think there are opportunities to pick sort of the three to five areas in these segments where you can evaluate going direct and getting a better opportunity there with the focus. And obviously, the core products and the devices that are already being sold. OUS I think on the COOLIEF side of things, you have to look at -- for example, if you looked at an area like Brazil, you would look at the private market there when things settle out. Obviously, there's certain sort of currency issues and budget issues there. But there are pockets versus sort of trying to spread that, maybe, too thin across the business. And then I think it's about over time, the data required in these markets for all the products and the approach is different than the U.S. and it's not uncommon. Almost every business that I have run has had a U.S.-centric approach initially. But I think if we bring a different view out to the markets, there's definitely opportunity there, because there's not enough proportion of our sales are international.

Great. And then Steve the tax rate came in a little bit better this quarter. For the full year, we're still expecting around that low 30% range. So, I just wanted to get an update as to where you are with your ongoing tax improvement initiatives and why we shouldn't expect to see those improvements continue within the back half of the year?

Yes, well, I'm glad to get a tax question because we've done a lot of work in that space. And no -- yes, pleased with the progress. When we set the guidance for 2017 at 32% to 34%, embedded in there was some work that had to be done to get there. You recall that the end of last year, we ended around 32%, but we had some one-offs in the fourth quarter that didn't make that the sustainable number and what we wanted to do for this year was get more to the low 30s in a sustainable fashion. And so we have a couple of projects that we have been working on, one of which we executed in the second quarter and that's what drove the rate down to the 27%. Inside there is a combination of benefits from 2017, a little bit of catch up from one strategy we were able to take from 2016. But as you look forward for the balance of the year, you're going to see the next two quarters sort of level out at a pace that gets us inside that 32% to 34% for the full year. But obviously, we'd love to over-deliver that and wind up lower. But we still have more to do on the tax side. And then at the same side, you start thinking about next year and what's going to take us the next step down.

Okay, perfect. And then just finally, Robert, it was great to hear you on the call today. I just echo everyone else's sentiments. It's been such a pleasure to work with you and I hope you enjoy your retirement. And Joe, we look forward to working with you further. Thanks for answering our questions.

Thank you, Brittany.

[Operator Instructions] The next question will come from Chris Cooley of Stephens. Please go ahead.

Good morning and let me just echo those same sentiments. Robert, hope you enjoy retirement. And we're going to miss you. But Joe, look forward to working with you going forward.

Thanks Chris.

Maybe if we could just start. Maybe -- Joe, maybe it's a little bit premature in this regard. But you talk about accelerating growth through M&A and moving into higher acuity type offerings. Does this mean that we need to change the framework in which we contemplate the company's M&A activity? I know Corpak essentially spoiled us all with cash-on-cash accretion there very early on. Just talk to us about how we should think about that as well as what I would assume to be the incremental investment you'd need to really tack into the wind on that type of an opportunity and execute it from a sales perspective thereafter.

Yes, I don't think, initially, you really have to change your model and the way you think about M&A. Because I think the first step for us is just to continue to the great strategy of moving up and down this four product segments looking for the bolt-on, accretive deal. And the team has shown a competency in that and by the very, in fast integration. So, that gives me great comfort in that. Sometimes these deals, obviously small ones, and smaller than Corpak, as an example, take as long or longer as the big ones do. That doesn't mean that if something popped up on the platform side, that we wouldn't take a look at it but absolutely made sense. But I think that that's more of a second step in our business moving again, as I said in the upfront, more towards the end of 2018. And then I think, by the ways to your other question about -- we have the capacity to sort of do $300 million or $400 million in acquisitions. So, in that realm, a platform can be a business growing at $80 million or $100 million, but a new platform. So, it doesn't have to be that you are leaving yourself enough powder.

Understood. Appreciate that. And then maybe just one quick one for me with Steve. When you look at the Med Device margins, really standout performance during the quarter. I just want to make sure I'm hearing you correctly on this. Was the bulk of that through manufacturing efficiency? I mean ,obviously, better growth on COOLIEF and ON-Q, but just want to kind of try and think about how to frame that as we go through the back half from a margin contribution standpoint. Thank you.

Certainly from gross margin impact, but more so in the case on the Device side with the R&D. And if we had spent more on the R&D side, more in line with the planned ramp up, you would have seen a little bit lower margin on the Device side. Still good, still probably ahead of our plan for the year. But that's the biggest lever. We do get some gross margin benefit on the device side as well, but how we profile that R&D piece can be a big driver quarter-to-quarter.

Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back to Joe Woody for his closing remarks.

I'd also like to thank Robert for his contributions to the company and thank all of you. I want to conclude by saying I'm very excited. I hope that it comes through in my voice about our future and embarking on the next phase in Halyard's transformation strategy. So, thank you for your interest in Halyard.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. At this time, you may disconnect your line.